Local Authorities, the new Developer Market?

Councils are exploring innovative approaches, forging new partnerships with developers, engaging in direct development on their own land, or investing in commercial and retail property.

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Local authorities vary in the size and nature of their land and property holdings, but all face the challenge of justifying ownership, streamlining the portfolio, and allocating resources appropriately. Housing and other public amenities are needed, despite falling budgets.

For many years the norm has been for authorities to sell vacant land to developers, and/or to enter into joint ventures with developers for the provision of new building stock. Increasing pressure to maximise returns from the portfolio has resulted in many authorities now exploring alternative approaches.

Progressive local authorities have started to re-engage in direct housing development, across all tenures and using a variety of development arrangements and funding tools. They may choose to develop on their own land, viewing the continued ownership as a better contribution to the local authority income stream. This approach can enable local authorities to build in locations that may have more need, and to get maximum return on smaller or less straightforward sites where developer interest can be hard to attract.

It may be possible to build to a higher standard, with improved quality in the finished product. Another benefit is that local authorities may have less focus on maximising shareholder value/profit. This could allow them to concentrate on providing a higher proportion of affordable housing, or to use the returns to provide cost-neutral civic or leisure facilities. Additionally the authority may prefer having more control over the scheme and there is potential for local interests to be considered. For example, procurement strategies can be designed to support local contractors and improve local skill levels.

The developer is by no means out of the picture, however. Many of the larger council-led schemes are based on an initial phase of work funded by the council to start the regeneration. Future roll-out of phases are likely to be based on a joint venture partnership with developers.

For local authorities, building on their own land isn’t the only move into developer territory as they seek to generate the income needed to fund public services. Some have become increasingly acquisitive in commercial real estate, attracted by the growing gap between the cost of debt and property yields. It can make sound commercial sense with cheap loans available from the Public Works Loan Board, and especially where long-term relatively safe income from reliable tenants can be targeted. Retail has also become a focus for local authority investment, as a means of regenerating high streets and obtaining greater control of the community retail provision.

Alongside the opportunities, however, there are risks which would otherwise sit firmly with the private developer. Exploring viability is especially important, to avoid investing a lot of time in attractive designs which then need ruthless value engineering to make the costs add up. Developer experience would undoubtedly speed up this process. Local authorities also need to be ready to make early decisions on their main drivers. Do they want to maximise returns? Do they want to provide generously-sized properties, with decent public realm? Good proportions of affordable housing? Good parking provision? Unlike developers, they can’t appeal against their own planning departments, and can’t reduce social housing provision based on returns.

Councils need to assess all the risks and develop robust mitigation measures. When building on their own land, typical risks include cost over-runs, lack of relationship with the residential supply chain, issues with management of project teams and contractors, and difficulty in ensuring that the final product is appropriate for the market. Councils may well conclude that they prefer to work with a developer who will help them navigate these risks.

Faithful+Gould has supported several local authorities in developing on their own land. Where there is limited in-house construction and procurement expertise, support is typically needed around these issues:

Managing aspirations and creating a realistic vision

Developing a precise brief and communicating it to the market

Exploring funding mechanisms

Determining the budget and maintaining affordability

Developing a procurement strategy

Ensuring the procurement process aligns with the statutory requirements

Incorporating lessons learned as the programme progresses

Some authorities have become early adopters of self-development, using this method where appropriate, often on a programme of development across several sites. Schemes may be housing-led, with some incorporating council offices or leisure facilities. Aims typically include the improvement of housing stock quality and the development of neglected areas. At the same time, authorities may plan to build an ongoing private rented sector income, and to advance their expertise in residential development.

Our team is focused on helping local authorities achieve a balance between quality and affordability, ensuring the right product for each site. We are working with clients via the Pagabo National Framework Agreement and other procurement routes, providing Clerk of Works, cost management and project management on a variety of development schemes.